— RAJA FAISAL HISHAN/The Star
PETALING JAYA: The expanded sales and service tax (SST) has not only raised costs, but also left many businesses fuzzy about the type of taxable services.
While the SST regime is clear about the core services, uncertainty often arise over the other services, according to Deloitte Malaysia indirect tax leader Tan Eng Yew.
“Although it is clear the service of a construction contractor falls under the category of construction, the inclusion of other related activities such as extension, installation, repair, renewal, removal, renovation, alteration, dismantling or demolition creates a challenge for businesses who are undertaking a limited scope of work to determine if they fall within the taxable scope,” he told StarBiz.
Implemented on July 1, the SST was expanded to five new service categories: rental or leasing, construction, financial services, healthcare, and education.
To ease the impact on households, only discretionary and imported goods are taxed, while local substitutes remain at 0%.
Exemptions include group relief (intra-group transactions), business-to-business (B2B) between registered businesses, and a 12-month grace period for non-reviewable contracts stamped before June 9, 2025.
The B2B exemptions had been restrictive due to the requirement that it only applies between businesses registered under the same taxable service category and dealing in the same type of taxable service.
Tan said the rule should be broadened so that the exemption applies whenever one service tax-registered business acquires a taxable service from another. This should further reduce the undesirable effect of embedded SST along the supply chain.
Among the affected industries, the construction sector is likely to face the biggest challenge given the wide range of services it relies on, many of which fall outside the narrow B2B exemption.
Master Builders Association Malaysia president Oliver H.C. Wee said in normal cases, all extra or additional costs arising from the SST shall be passed onto the client, unless the contractor is willing to absorb it, which is unlikely.
He said cash flow management for contractors has always been very tight and that contractors cannot afford to pay upfront the additional taxes, before payment from their clients.
“Contractors already have to provide for contractual requirements such as retention sum which affects monthly cash flow and performance bond which is one off.
“Furthermore, there are many statutory payments including Employees Provident Fund and HRD Corp contributions.With no fluctuation clauses in private contracts, it causes more financial pressure to contractors,” he said.
Meanwhile, Malaysian Iron and Steel Industry Federation said the expanded SST scope presents a “material and compounding” impact on the steel industry as the tax subjects most critical raw materials used in steelmaking – previously exempted – to 5% sales tax.
“Among the affected raw materials now subject to 5% SST are steel scrap, coking coal, coke, stainless steel and zinc ingots,” it said.
Nonetheless, KIP Real Estate Investment Trust
(KIP REIT) chief executive officer Valerie Ong Pui Shan said thus far, the impact from the SST has been “manageable”.
“Master lease tenants are not impacted as increments are fixed over the lease period. Our community-centric and necessity-focused tenant mix provides resilience, with tenants generally understanding the changes,” she said.
Ong said rental revisions will proceed on a business-as-usual basis and the group will continue to adopt its “2+2” rent model strategy.
“Master lease agreements, which already have built-in reversion clauses, further support stability and income visibility,” she said.
That said, Ong acknowledged that REITs may be indirectly affected via potentially slower rental reversions and higher operational costs across industries. In response, she said KIP REIT will continue to focus on driving efficiency, managing expenses, and ensuring profitability remains resilient.
“While business fundamentals remain intact, we are proactively adapting our rental structures by exploring fairer mechanisms such as base rent and gross turnover rent models, sharing upside with tenants.
“There will also be tighter monitoring of costs and productivity. In terms of asset enhancement initiative and competitiveness, the group will modernise its malls, enhance tenant mix, and build stronger community engagement through CSR, advertising, and promotional events. With regards to stakeholder communication, we will ensure timely updates on SST impact and mitigation strategies,” she said.
